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Ally Bank Increasing Early Withdrawal Penalty on New Long-Term CDs

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Ally Bank

For the last several years, Ally Bank CDs had one important feature that gave it a big advantage over CDs at other banks. That advantage was a small early withdrawal penalty (EWP) of only 60 days interest. I’m afraid that’s coming to an end. Ally Bank’s EWP for CD terms of 3, 4 and 5 years is going up. However, it’s important to note that Ally Bank is doing the honorable thing by making this change only to new CDs and renewed CDs. This won’t impact existing CDs. The new EWP will take effect on December 7, 2013, and there will be no changes to CDs opened or renewed before this date. Ally Bank will soon be updating its website to note this change, and it will be sending notification to customers early next week.

Below is a summary of the new early withdrawal penalties. As I mentioned above, the change only impacts CDs with terms of 3, 4 and 5 years. Also, it only affects new CDs or CDs renewed on or after December 7, 2013.

  • 3 year CD: 90 days’ loss of interest
  • 4 year CD: 120 days’ loss of interest
  • 5 year CD: 150 days’ loss of interest

Update 10/26/13: Ally Bank is now listing the new EWPs in the fee section of its CD page.

You can use our Early Withdrawal Penalty Calculator to see how this change will affect Ally CDs. For example, with the current Ally Bank 5-year CD that has a 1.60% APY, an early closure after one year would result in an effective yield of 1.33%. The 60-day EWP basically reduces the yield from 1.60% to 1.33%. If this yield remains the same on December 7th and you open the 5-year CD and close it early after one year, the effective yield will be 0.93%. As you can see, the larger EWP reduces the effective yield of the CD that’s closed early.

The effect of the EWP goes down when the closure is delayed. As you can see in the Early Withdrawal Penalty Calculator, the difference in yield at year one is 40 basis points. At year four the difference is only 10 basis points. Of course, if the CD is held to maturity, the EWP has no impact.

My Take

I’m disappointed in this change. However, I’m relieved to see Ally Bank is not making retroactive changes like what two credit unions did (see post). Also, it’s nice to see Ally Bank is communicating this change early. As I mentioned above, customers will be notified directly by Ally Bank of this change more than a month before the change takes effect.

Finally, it should be noted that the new EWPs are still competitive compared to other banks. Below is a summary of the EWPs of 5-year CDs for a few banks and credit unions:

  • Pentagon Federal Credit Union: up to 365 days
  • Discover Bank: 6 months
  • Barclays: 180 days
  • Nationwide Bank: 360 days

I’m afraid Ally Bank is one of many banks that have increased early withdrawal penalties this year. It’s clear they realize that customers will likely close CDs early to take advantage of higher interest rates when this awful interest rate environment finally ends. I know some readers still have concerns that banks may refuse early withdrawal requests. As we have discussed many times, several banks (including Ally) have clauses in their disclosures which give them this right. I can’t say how likely banks will make use of these clauses. The concern is that it will be more likely if interest rates shoot up.


  Tags: Ally Bank, CD rates

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Comments
19 Comments.
Comment #1 by Anonymous posted on
Anonymous
Inevitable. But they did it the right way.

11
Comment #2 by Shorebreak posted on
Shorebreak
The first time some financial institutions start offering 5-year nationally available certificates of deposit, yielding 3%, then it's "Katie bar the door". Ally Bank evidently is aware of this.

8
Comment #3 by Anonymous posted on
Anonymous
A while ago, I warned people not to abuse Ally's 60-day generosity.

2
Comment #4 by Anonymous posted on
Anonymous
"...when this awful interest rate environment finally ends..." With Yellen at the helm, the markets swooning every time the Fed threatens to withdraw the monetary crack, the economy stubbornly moribund, and the printing presses rolling, don't hold your breath. When the party ends at long last, we'll have the reckoning.

8
Comment #5 by Anonymous posted on
Anonymous
I wouldn't be surprised if Ally offers some new higher rate CD specials in the near future. Their corporate note and brokered CD offerings tell me they need money.

8
Comment #6 by Anonymous posted on
Anonymous
This is only symbolic, should the rates go up, they will totally ban any withdrawals. Beware, they call the shots not you.

11
Comment #7 by mrvirgo posted on
mrvirgo
Ally's Savings and Money Market accounts went from .85 to .86%. I don't know when this increase happened, but with any luck, it's a signal of things to come for all their savings products.

5
Comment #8 by RJM posted on
RJM
Just noticed that Ally increased their rate on savings & money market accts to .86%

It was .84% just days ago I believe.

 

 

3
Comment #10 by Anonymous posted on
Anonymous
As Ken mentioned.  Ally canchange terms on existing CD's at anytime oer their disclosures.  Also, Ally is mostly owned by the goverment which can do waht it pleases.  Also, GM is going to make it's own finance are again and that will hurt Ally

1
Comment #11 by Anonymous posted on
Anonymous
They are doing this not so much because rates are going to go up a lot. With Janet Yellen as Fed Chairman, all bonds will eventually be purchased by the Federal Reserve. Interest rates will rise a point or two, but not much more than that. What the banks, like Ally, are really afraid of is what will happen once the country actually enters a modest recovery mode. Inflation is going to soar into the high double digits. The government will continue to lie, but the inflation is going to be so high that it will, by then, have no credibility left, even with the most gullible people. Inflation may rise from the current 8-9% per year to, maybe, 35-40%, and a lot of people are going to be trying to withdraw their money from CDs and bonds as the rise is happening, and once it gets to steady double digits.

That's why I won't buy any CDs at all, regardless of the "early withdrawal" penalties they announce. Indeed, if the banks get desperate enough, they will simply unilaterally, and without notice, change the withdrawal penalty retroactively for all their deposits, and the government will, no doubt, back them up, just as it backed up Fort Knox Federal Credit Union. Yes, you could, potentially sue them and win. But, you'll get your money when? After the class action (which will surely be brought) churns its way through the legal system, for maybe a year or two or three, your cash will be worthless anyway.

6
Comment #12 by Alskar posted on
Alskar
In my view, this makes Ally's longer term CDs uncompetitive.  The rate on their 5 year CD is only competitive now due to the 60 day EWP.  Unless they raise their rates, after December 7th (a day that will live in infamy!) Ally will have to competete against other CD's with significantly higher rates and an EWP that is just 30 days longer.

Unfortunately, I have a CD that matures on Dec 9th so I will not be able to get the current EWP when it is time to renew.  Bummer...

The 2.15% APY at Credit Union West on 5 year CDs is looking pretty good these days!

4
Comment #13 by Anonymous posted on
Anonymous
Don't forget the 0.25% bonus for renewals that they have been offering. 

5
Comment #15 by Alskar posted on
Alskar
#13:  I was taking the 0.25% bonus into account.  Currently Ally's 5 year IRA is yielding 1.60% APY.  Assuming Ally continues to offer the 0.25% bonus, that gives a total of 1.85% APY.  Given that I can get 2.20% APY from Credit Union West, Ally's 5 year CD offerings are not competitive once the EWP is increased from 60 to 150 days.

4
Comment #14 by QED posted on
QED
No question when rates rise they will lock our CD money until maturity.  As things become worse they will allow no withdrawals at all, only renewals at rates which do not match inflation.  The final straw will come when they tax our savings (not just the interest) in situ, as has already happened in Cyprus.

It's amusing such extreme measures are unthinkable today.  But America has twice voted for hope and change.  I'm not seeing a lot of hope.  But you can absolutely rely on the promised change, which will appear in the form of wealth redistribution.  America is being transformed from a Republic into a democracy.  There is a reason we were founded as a Republic, as many CD owners in future will discover.  

4
Comment #16 by Anonymous posted on
Anonymous
No big deal since Ally will just have to substantially raise their 5 yr CD rates to remain competitive now.

1
Comment #17 by Anonymous posted on
Anonymous
This is the officail email announcement:

  • Early Withdrawal Penalty for CDs
    We will be changing our early withdrawal penalty for longer term Ally Certificates of Deposit (CDs) and Individual Retirement Account (IRA) CDs. Any CD or IRA CD with a term of three (3) years or longer that is opened or renewed on or after 12/07/2013 will have the following early withdrawal penalty structure:

    3-Year CD – loss of 90 days interest
    4-Year CD – loss of 120 days interest
    5-Year CD – loss of 150 days interest

    Many of our CD's are unaffected by this change:
  • Any CD or IRA CD with a term of three (3) years or longer that was opened before 12/07/2013 will continue to have an early withdrawal penalty of 60 days' loss of interest until it matures. The withdrawal penalties shown above will apply if the CD is renewed for another term.
    • No Penalty CDs will continue to have no early withdrawal penalty after the first six (6) days after funding.
    • There is no change to CDs or IRA CDs with terms of less than three (3) years. They will continue to have an early withdrawal penalty of 60 days' loss of interest.

    1
    Comment #18 by Anonymous posted on
    Anonymous
    I'm a little weary after getting smoked by Perkstreet last month.  I remember that Perkstreet was featured on this website and then one day it was no where to be found.  A short while after that all my rewards were confiscated and now this.  I'm wondering if I should withdraw all my funds from Ally while the going is good....hmmm.

    1
    Comment #19 by Anonymous posted on
    Anonymous
    Some other changes in the Dec 7 update: The ability to refuse early withdrawls is nullified for old CDs. Page 1 says "A CD ... will be governed by the terms of the agreement in effect at the time the CD or IRA CD was opened". Those of us that got the 3% 5 year CDs predate the newer verbage about bank permitting a withdrawl. Page 4 now permits an account to be converted to an account for a Revocable Account (assuming SSN is the same). Ally used to permit conversions then later stopped all (forcing CDs to be closed and reopened), and now they're permitting simple conversions. ATM fee rebates will be reported to IRS, if $600 .

    1